If you currently work at a job where you receive a pension plan among your other benefits, consider yourself very lucky.
It’s currently estimated that only about 10 percent of Americans have pensions. Considering that this number was close to 40 percent about 25 years ago, this is significant, as many employers have cut pensions from their benefits package as a cost savings measure. And while it’s likely that you have a 401K with your employer and perhaps even a separate IRA, neither of those offer the financial security in retirement that a pension plan would. Because of this, many Americans are putting off retirement due to a lack of savings or approaching retirement with insufficient income.
Yes, it’s perhaps more important than ever these days to plan appropriately for retirement. And while 401Ks and IRAs are great things to have under your belt (not to mention Social Security, should you qualify), another option that’s worth discussing is an annuity.
Just what is an annuity? Essentially, it’s a contract between an individual and an insurer where the individual invests a sum of money in exchange for a guaranteed monthly income stream for the rest of that person’s life.
It’s an intriguing option, and in this post we’ll take a look at the various types of annuities and arguments for and against purchasing them to help you decide if this is an option worth exploring further when it comes to funding your retirement.
Types of Annuities
Before we get into some of the pros and cons of annuities, it’s important to take a closer look at the different types of annuities that are offered.
Fixed: If you’re worried about a fluctuating market, a fixed annuity is likely best for you. These annuities take the money you invested at a pre-determined interest rate. Think of it like a fixed mortgage interest rate.
Variable: Just as how fixed annuities have pre-determined interest rates, variable annuities come with rates that increase or decrease based on the market. So, for instance, if the market is doing great, your payments will be bigger. If it’s not a strong market, your payment will likely be smaller. There’s risk and reward with a variable annuity.
Indexed: This type of annuity is a combination of fixed and variable. Specifically, you’ll get a guaranteed return with the potential for even more if the market is in good shape.
Deferred: These types of annuities take the sum you initially invested and grow it in the market. These are generally cheaper, and are waiting for you when you’re ready to start receiving payments.
Immediate: Fitting to the name, the guaranteed monthly income stream kicks in right away after purchasing this type of annuity.
Is an Annuity Right for Me?
Most financial experts say that you shouldn’t prioritize an annuity over a 401K or IRA, but they can be an attractive option for several reasons. For starters, they help retirees with that guaranteed income they need to enjoy their post-work lives. Plus, with some types of annuities, the monthly payments a retiree receives could greatly increase depending on the health of the market. Like we said, however, most financial advisors encourage consumers to look at annuities as an ideal complement to other retirement savings plans.
It’s also important to note that annuities do have some disadvantages. For instance, you’re likely paying hefty sales commissions fees when you purchase the annuity, which can drive up the up-front costs. What’s more is that some insurers can be very pushy when it comes to selling these, as they’re working for the commission. Noting this, it pays to do some extra homework to make sure the company you’re buying from is reputable and ethical.
In fact, try not to be pressured by any insurance company. Instead, inquire with your financial planner about the annuity option and seek their recommendations and input. Additionally, depending on the annuity type, you’re likely not getting as much return for your investment that you would in other retirement savings plans. To piggyback off of that, annuity payments conclude when the person dies. They don’t transfer to any beneficiary.
Now that you know all this, is an annuity still right for you?
Regards,
Ethan Warrick
Editor
Wealth Authority
